The good news: The cost of investing continues to decline. The better news: The cost of investing at Vanguard continues to decline at an even faster rate.
According to a new research report from Morningstar, the asset-weighted average expense ratio across all mutual funds was 0.61% in 2015, down from 0.73% five years ago. Meanwhile, Morningstar reported that the asset-weighted average expense ratio of Vanguard’s funds fell to 0.12% from 0.18% in the past five years, the largest percentage decline among the 10 largest fund providers. Vanguard currently has the lowest asset-weighted average expense ratio at 0.12% in the industry, Morningstar found.*
Obviously, the less we charge, the more you keep. The more you keep, the better chance you have in achieving your long-term investment goals.
We have lowered the cost of investing for you in four important ways:
- Lowering fund and ETF expense ratios.Over the past six months, Vanguard has announced expense reductions for 200 fund shares amounting to aggregate savings of about $215 million. Some of our largest and most widely held funds are among the reduced-cost offerings, including Vanguard Total Bond Market Index Fund and our popular Target Retirement Fund series.
It’s a continuation of a trend that goes back decades. In 1975, when Vanguard managed $1.8 billion in U.S. fund assets, the average expense ratio for the Vanguard funds was 0.89%. Today, Vanguard manages more than $3 trillion in U.S. fund assets and the average expense ratio is 0.18%, or less than one-fifth that of the 1.01% industry average.**
- Making lower-cost shares more widely available. In 2010, Vanguard broadened the availability of its ultra-low-cost Admiral™ Shares by lowering the account balance minimums to qualify to $10,000 (from $100,000) for Vanguard’s broad market stock and bond index funds, and to $50,000 (from $100,000) for most of Vanguard’s actively managed stock and bond funds. Today, more than $1.2 trillion is invested in Admiral Shares, more than one-third of Vanguard’s assets under management.
While $10,000 may seem unattainable for smaller investors, consider that market appreciation can be an ally. A $5,000 IRA contribution invested in Vanguard Total Stock Market Index Fund at the beginning of 2009 would have grown to an Admiral-eligible $13,417 at the end of March 2016 (without adding another dime in contributions). The rising tide of the bull market from 2009 to today is bringing more and more investors to Admiral status.
- Introducing new low-cost products. Vanguard continues to introduce new funds and ETFs with category-leading expense ratios. For example, our new actively managed Core Bond Fund offers Investor Shares with an expense ratio of 0.25% and 0.15% for Admiral Shares. Vanguard Ultra-Short-Term Bond Fund, which was introduced in 2015, is similarly low cost—0.20% for Investor Shares and 0.12% for Admiral Shares. The expense ratios of these funds are 68% to 81% of the category’s industry average expense ratio for the Core Bond Fund and 64% to 79% of the industry average for the Ultra-Short-Term Bond Fund.**
- Introducing low-cost services. Vanguard made financial advice more affordable and accessible with the introduction of Vanguard Personal Advisor Services® in May 2015. The annual cost is a reasonable 0.30% of assets under management. In dollar terms, that’s $300 on a $100,000 account annually. Personal Advisor Services constructs portfolios using Admiral Shares, which feature an average expense ratio of 0.14%. So, all-in, average cost for advice plus funds is less than 0.50%.
Prudent, thoughtful advice can also save you from costly investment mistakes, such as improper asset allocation, poor asset location, and behavioral missteps, such as performance chasing or abandoning stocks during a market downturn. In fact, Vanguard research shows that an advisor can help an investor potentially earn more in net portfolio returns over time.***
Source: 2015 fee study: Investors are driving expense ratios down, Morningstar, Inc.
** Source: Vanguard and Lipper, a Thomson Reuters Company. Data as of December 31, 2015.
*** The Vanguard Advisor’s Alpha™ principles are discussed in detail in our research paper. The added value can materialize quickly and dramatically—especially during times of a rapidly rising or falling market, when you may be tempted to abandon your well-thought-out investment plan—or it may be added slowly. Source: Francis M. Kinniry Jr., Colleen M. Jaconetti, Michael A. DiJoseph, and Yan Zilbering, 2014. Putting a value on your value: Quantifying Vanguard Advisor’s Alpha.